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A Ten Dollar Ebook Is Fine. At Twelve Bucks It's A Vast Conspiracy

The private dining room at Picholine where book publishers allegedly collaborated to screw Amazon.

I’ve been reading the DOJ’s lawsuit against Apple and a handful of book publishers (blurry image, apologies) alleging antitrust and restraint of trade in the e-book business. It spins a tale about “Project Z,” a nefarious plot among Apple, HarperCollins, Simon & Schuster, Holtzbrinck and Penguin Group to raise ebook prices in the hopes of rolling back the era of the $9.99 Amazon Kindle ebook. Publishers have always viewed the ten-dollar ebook as an existential threat to their profits, and were only too happy to use Apple’s rollout of the iPad to kill it. Nine-ninety-nine, said one publishing CEO in the complaint, is a “wretched” price point. Penguin USA CEO David Shanks says in the complaint that e-book pricing “can’t be $9.99 for hardcovers.” That was the line they would not cross so they went to war against one frenemy, Amazon, in cahoots with another, Apple, the main difference being that Apple shared their interest in screwing the consumer out of a few more bucks. As the complaint lays out, Apple didn’t really have the publisher’s best interests at heart, either. Now they’re all in big trouble. (UPDATE: Three of the publishers have settled with the Justice Dept.: Hachette, S&S and HarperCollins. Apple, Macmillan and Penguin Group have not.)

The Feds have a high bar in having to prove conspiracy, says Forbes contributor Tim Worstall, but the complaint lays out a good bit of the government’s evidence, including 56 phone calls, several meetings in London and New York, some of them at fancy group dinners at Manhattan restaurants like Picholine and Alto, and lame attempts to cover up a paper trail by doing something to emails called “double-delete.”

The ball got rolling when, in the words of a February 19, 2009 email from Apple executive Eddy Cue, the time was right to “trounce Amazon by opening up [Apple's] own ebook store.” According to the complaint, Apple initially contemplated selling ebooks through the traditional wholesale model, in which the manufacturer leaves it up to the retailer to set/slash the price of an item. That’s how Apple sold digital media on iTunes. The complaint also alleges that Apple for a time considered “illegally” dividing the digital content world with Amazon. Apple would take audio and video and Amazon would get books. (That would have been insane, and the complaint never addresses how that plan fizzled out.) Apple around that time also concluded, says the complaint, that competition from other retailers would prohibit it from getting its accustomed 30% gross margin on ebooks. So Apple, says the complaint, decided to help set in motion Project Z: collaborate with the publishers on a new model that would impose higher prices on the entire industry. In the words of Steve Jobs, says the complaint, the message from publishers would be “we’re not going to give you the books” unless you sell them the way we tell you to sell them. Charming.

The complaint alleges that, starting in September 2008, the publishers named in the lawsuit (several others have already settled with the DOJ) had already been engaging in meetings, phone calls and emails in which they “jointly acknowledged to each other the threat posed by Amazon’s pricing strategy and the need to work collectively to force up Amazon’s retail prices.”

Apple’s Eddy Cue rang up all the publishers named in the lawsuit plus Random House in early December 2009 to set up exploratory meetings. Hachette and HarperCollins allegedly were already talking about moving to a new kind of pricing model called the “agency” model, in which the manufacturer (publisher) would decide the price of the book and appoint the retailer as their “agent” with no power to set a lower price. A Harper exec rang up a Hachette exec and they talked for six minutes the morning of December 10. Less than a week later both execs told Cue they wanted to try out this agency model, breaking with a century-old tradition of how books were sold.

Apple was turned on by the idea to say the least. The agency model was, according to Steve Jobs an “aikido move.” Jobs was on the record as telling publishers: “You set the price, we get our 30% and yes, the customer pays a little more, but that’s what you want anyway.” Apple didn’t care what people paid as long as it had the books to sell and it got its 30% cut. The publishers had no choice but to align with Apple. They had no leverage on their own to get Amazon to raise its prices unilaterally. One email from a publishing executive says that “without critical mass behind us Amazon won’t ‘negotiate,’ so we need to be more confident of how our fellow publishers will react…”

On December 16, Penguin Group CEO John Makinson breakfasted in a London hotel with a rival publisher CEO. The latter wrote to an underling in the U.S. that he would only recount portions of the Makinson discussion by telephone. By the time there was a second round of meetings in December 21, the agency model was already the focus of the discussion. Apple allegedly proposed that the publishers make all of their retailers adopt the model. That went down well, allegedly. Cue reported back to Steve Jobs that the publishers saw the “plus” of Apple’s position as “solving the Amazon problem.” The “negative” was that Apple’s proposed retail prices, a max of $12.99 for a bestseller, were a “little less than [the publishers] would like.”

Apple had now seen its lever and pulled it: give the book people what they want in exchange for a rich 30% cut of ebook sales, a higher margin than prevailing ebook retail margins. The publishers squirmed a bit at the idea of paying Apple that much when the price being discussed were lower than they would have liked. Problem solved when the publishers convinced Apple to let them raise their prices. Through to January 2010, Apple continued to keep publishers apprised of its ongoing negotiations with all the other publishers, according to the complaint. Apple’s Cue sent out what the complaint says are nearly identical emails to all the defendants in early January outlining the “best approach to ebooks.” It included the agency model applicable to all retailers, identical pricing tiers for all publishers on Apple’s iBooks store and the 30% commission for Apple. When the final agreement went out on January 11, Apple amended it a bit, allegedly also asking for same-time release of books in print and digital and complete access to every publisher’s digital catalog.

But the clincher of Cue’s revised terms was that Apple replaced the requirement that all publishers adopt the agency model with a “most favored nation” provision requiring that publishers lower the retail price of each ebook in Apple’s iBookstore to match the lowest price offered by any other retailer, ”even if the Publisher Defendant did not control that other retailer’s ultimate consumer price.” Apple wouldn’t have to worry about price competition at all, says the Feds in their complaint, and effectively stripped all other retailers of the advantage they might seek in discounting or price-promoting ebooks out of their own margins. There could be no price competition without Apple benefiting the most. No matter, all the publishers caved to the new terms, but made sure they got assurances from Eddy Cue that they wouldn’t be the only publishers signing the deal.

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The fancy dinners are irrelevant. The smoking gun is that virtually every major publisher signed an agreement with Apple, all with identical terms, at the same time. If that’s not market collusion, I don’t know what is.

The title seems to downplay the important point here. I don’t think it’s an issue of whether $2 is a big or small impact to the price. Even switching to the ‘agency model’ where the retailer gets a percentage of the sales price doesn’t sound like a problem to me.

As soon as the publishers get together and agree on what the pricing tiers will be or on how they will price books, that sounds illegal to me. Whoever made those agreements for the publishers should probably do some jail time.

What’s sad is that a certain “segment” of critics will call this free market capitalism when it’s exactly the opposite of that and in fact very similar to the methods used by the federal government to help pick preferred “winners” (usually campaign contributors) in the market place. Throw the damm book at em! (pun intended)

However, as a consumer I did get the squeeze. I appreciate anybody’s ability to make a profit just as I appreciate the consumer’s right to make a choice. Here, my choice was taken away from me. And yes–to the author of the article–I am still ticked off that my Amazon ebooks jumped in price. The publishers should know that, in fact, I have not purchased several books due to their $12.99 price (I won’t even consider the two higher prices) because it is, in fact, cheaper to purchase a hard copy book at Barnes & Noble with my discount card.

To me the fault doesn’t necessarily lie with Apple. It lies with the publishers who are clinging to a business model that is changing faster than their 5 and 10 year business plans will allow. They didn’t want to accept ebooks as a viable distribution method. They intervened against the free market to protect their interest. Now the government is intervening back to supposedly protect the free market–illustrating there is no free market as once the government gets involved…it’s all downhill from there.

Frankly, I find $9.99 to be too expensive for a product that I do not own. If I owned it, I would be able to give it away to my mother to read, donate it, or do whatever else I pleased with it. Digital products are subject to a variety of regulations that imply that we do not, in fact, own them. I’m not paying $9.99 to RENT a book, no matter how long I get to display it on my device of choice. I can pick up used copies of books for darn cheap. I understand that this is what the companies don’t like. Too bad. It’s disgusting how much they gouge us for these materials and how little they care at all for the human element of their businesses.

If you knew how much it actually costs to make an ebook, you might understand it more, and as someone who works in the publishing industry for an indie publisher, I admit that maybe we haven’t done a good enough job of explaining why it’s not as easy as creating a PDF with a watermark and then you’re done. When I was in college, I remember how common it was to complain about the cost of school books. At the beginning of one particular semester, our school bookstore handed out a postcard or a flyer that showed the actual breakdown of costs, and believe it or not, I remember having a better understanding of why the prices were what they were.

Look, the publishing industry is not an industry that most people would call thriving; some publishers are doing better than others, but overall, it’s and industry that’s been struggling for years (let’s all remember Borders closed everything down last year, for example). When you consider what it costs to keep an industry afloat in a shrinking marketplace (again, think of all of the bookstores that have closed), the fact that yes, ebook sales are rising but not quite surpassing print sales yet, and that it takes a good, dedicated staff of people (along with an author who also would like to have some money to continue touching lives with their writing), $9.99 isn’t a lot to ask. Maybe, it’s not even enough.

Retail is having a hard time because they commoditized their sales force. No one wants to go into Borders or Best Buy only to be served by a rude teenager who wants nothing to do with you. You can get -no- service at any web site. Add in consumer reviews – something a major retailer would be loathe to do – and yes, they’re hurting.

But publishers are not retail, and your examples included none in retail. The marketplace is not shrinking – it’s the same size as before. It’s migrating and you’re lagging behind.

A book has to be laid out for a PDF or for a printing press. (My father was an offset printer for over 30 years and worked for a major publisher, a comic book publisher, and the Federal Reserve Bank in the end.) In today’s world, I can’t imagine that process is all that different. Maybe the publisher doesn’t have to worry about the layout process as they’ve contracted that out to the printer, but it’s *there* and you’re paying for it. Now you remove the paper, the binding, the storage, the transportation, the middle men, and the unsold returns – and you want to claim $9.99 is a valid price? (Not to mention an eBook in PDF is nearly worthless and shouldn’t be produced unless there’s a need like with textbooks.)

In addition to charging us the same or higher price for an eBook edition, you strip us of our first sale rights and introduce the ability to recall a book if you decide you don’t want it on the market anymore? Leaving us with what recourse?

You can’t raise prices and reduce what you’re giving us and expect an informed consumer to accept that. I’m sorry, that’s not how it works.

Now, notice I’m not saying publishers aren’t needed. To separate the chaff from the wheat, to edit, to restrain, to advertise, to serve as a liaison – these are all very needed roles in the publishing business.

I could be wrong. Everything above is my perception. If you have a breakdown of costs for a traditional book versus an eBook, please, provide it and educate me. Otherwise, to me, it seems like you’re complaining – just like the author in another comment – that you can’t keep your prices high.